The US-based Heritage Foundation has, as always, ranked HK as the freest economy in the World. For once, the Government doesn't accuse foreign forces of interfering in HK's internal affairs. But this rosy view is not held by those who take the time to study the domestic economy. Here are a few things that Heritage may have overlooked.

Hong Kong's not-so-free economy4 February 2018

In the wake of The Heritage Foundation declaring HK to be the
World's Freest Economy
for the 24th year running, here is a list of just a few things that they may
have overlooked, in no particular order:

Transport

The Government sets the fares of buses and green Public Light Buses
(PLBs, or minibuses) and decides who can run bus routes and which bus routes they
must run in exclusive franchises, cross-subsidising loss-making routes with
profitable ones.

The Government sets taxi fares in each of 3 geographic territories
(Urban, New Territories and Lantau). Within each territory, the tariff must
be the same for all operators, eliminating any price competition between
them.

To drive a taxi for a living, you must pay someone else not to, by
renting or buying their licence. There are only 18,163 licences. There have been no red (Urban) or green
(New Territories) licences issued since 1994, despite huge demand, resulting
in a current premium
of around HK$6m per licence. When 25 blue (Lantau) taxi licences were
tendered in Apr-Aug-2016 (the first since early 1997),
they
fetched an average HK$5.64m each.

There have been no new Public Light Bus licences issued since 1976.
There is so much excess demand that the 4,350 licences are currently worth
about HK$4.44m each, based on the 30-Sep-2017
interim report of
AMS Public Transport Holdings Ltd
(0077).

There is a de facto cap of 7,000 Non-Franchised Buses (NFBs), which
are used for residents' shuttle-buses, school buses and tourism amongst
other things. The excess demand for these results in a premium of about
HK$2.5m per licence. That was the value attributed to each licence when the
largest operator, Kwoon Chung Bus
Holdings Ltd (0306)
bought companies which owned 98 of them on 1-Sep-2016.

No wonder then, that at peak times, many people can't get a seat on a
minibus or in a taxi, and resort to driving a private car to get kids to
school or go to work.

What's holding back reform? Vested interests who elect the Chief
Executive. We also note that there is no public declaration of family
interests in taxi, PLB or NFB licences by members of the Government,
Executive Council or Legislative Council.

There are statutory caps on the numbers of Private Hire Car licences
(400 for Hotel Service, 400 for Tour Service, 1500 for Private Service). In
practice, the Government has not even issued all of those (only 162, 116 and
648 respectively at Jul-2017), making it
practically illegal for anyone to drive a private hire car for Uber or its
competitors. The Government has reacted to Uber et al by proposing yet
another quota-based "franchised taxi" scheme for 600 fixed-term licences in
3 franchises of 200 cars each, a mere 3.3% increase in supply.

Meanwhile, the Consumer Council has
gently suggested that if the franchised taxi scheme doesn't "deliver its
promise" (whatever that means), the Government should consider at least
issuing the remaining 852 Private Hire Car licences, which would barely make
a difference, and even then, they suggest vehicles should not be older than
7 years. Our Toyota Picnic is just fine and perfectly roadworthy at 12+
years, so why can't we start driving it for hire?

While you can't get a taxi, a minibus seat or rent a hire car with
driver, this is not a problem if you have a private driver for your own car,
or hold a senior government position which includes a chauffeured car,
leaving many of the elite clueless as to why the public are so unhappy with
the system.

By the way, the Government unfairly competes with private parking operators by
charging only up to HK$2 per 15 minutes for metered parking spaces and even
then, only sporadically enforcing the charge.

Finance

We have a statutory monopoly stock exchange. The law
prohibits anyone from operating a
stock market unless they are The Stock Exchange of Hong Kong Ltd (SEHK)
or its controller, Hong Kong
Exchanges and Clearing Ltd (HKEX, 0388). So we have no competition for exchanges. The
result is higher transaction costs, wider bid-offer spread tables and more
rigid practices than a competitive market would produce. It is no
coincidence that HKEX's future profits are valued at some 1% of the entire
market, making it the
15th largest HK-listed company at the end of January.

Despite only holding 6% of HKEX, the Government controls it by a
statutory scheme which only allows shareholders to elect 6 out of 13 seats.

The Government has
exempted HKEX and its subsidiaries, including SEHK, The Hong Kong
Futures Exchange Ltd and their respective clearing houses, from the
Competition Ordinance.

Although hundreds of different bond issues are "listed" on the Stock
Exchange, they almost never trade there. The
HK Monetary Authority allows retail banks to
distribute new bonds to the public, but does not require the banks to obtain
"best execution" (the best available price) when customers want to sell or
buy existing bonds. That results in
wide bid-offer spreads
to captive bank customers, and deters the public from moving their cash out
of bank deposits, which protects the cheapest source of funding for banks.
This protectionism is why HK does not have a liquid retail bond market. The
HKMA is more interested in bank stability than in competition, when it has
to make a choice between these goals.

Commerce

We have a gambling monopoly. Nobody can operate a bookmaker or lottery in Hong Kong unless they are the Hong Kong Jockey Club,
which takes bets on horse races, overseas soccer matches and runs the Mark
Six Lottery. There are no betting exchanges. It is also
illegal for anyone (including tourists) to place a bet from within HK
with a licensed overseas bookmaker. This is a protectionist measure to
bolster the Jockey Club's monopoly. The vast bulk of the profit goes
straight to the Government as betting duty, but to provide a fig leaf excuse
for the monopoly, some of the profit is washed through the Jockey Club
Charities Trust which does things the Government would do anyway like build
clinics or school buildings, or things the Government doesn't wish to
justify to the LegCo Finance Committee, such as the Central Police Station
project or the Palace Museum.

Casinos are illegal (unless you count the stock exchange). That's part
of a national policy to protect the other Special Administrative Region,
Macau, which has no stock exchange. However, China is now
reportedly considering allowing casinos in Hainan, so if Hainan, then
maybe HK too, but we wouldn't bet on either happening. The Hainan rumour
could just be a wish inspired by
HNA Group's reported problems.

It is illegal to resell
entertainment tickets for more than their face value (except for events at
venues controlled by the Leisure and Cultural Services Department). As a
result, HK has no viable ticket agents or exchanges.

More generally, the Government distorts the efficient allocation of
scarce land resources by designating land for specific purposes such as
hotels or data centres rather than requiring those sectors to compete with
others in land sales. It also micro-manages land lease conditions, sometimes
specifying the minimum number of apartments that must be built on a
residential site, or that a specific
commercial development must include a cinema (as proposed).

The Government owns theme parks - 100% of
Ocean Park Corporation and the
majority of Hongkong International
Theme Parks Ltd, the owner of HK Disneyland, which was given 126ha of
land for only the cost of reclamation, accompanied by the usual claims of
"economic benefits" without looking at the economic opportunity cost. An
adjacent 60ha piece of reclaimed land sits vacant, under option to the
company.

Information on companies is rationed behind the paywall of the
Companies Registry, reducing
transparency and facilitating fraud and corruption. The registry would make
a huge profit from filing fees alone, although it should be run on a cost
recovery basis, so it could easily afford to eliminate search fees, open up
the data and cut filing fees.

Electricity is generated,
distributed and supplied by two de facto geographic monopolies, one for HK
Island and Lamma (where the power station is), and one for everywhere else.
Under the "Scheme of Control" since 1964, they are permitted a fixed
after-tax rate of return (now 8%, formerly even higher) on fixed assets,
after depreciation, fuel, labour and all other costs. Think of it as a
tax-free bond. The consumer tariff is
tilted for political reasons, charging large households more per
incremental unit than small households with lower consumption. Live alone,
or get your own meter. In 2015, both the Competition Commission and the
Consumer Council urged
the introduction of competition in the sector, following the example of
Singapore. The HK Government responded by
locking in the Scheme of Control for another 15 years until 2034.

Access to Justice

Lawyers are
prohibited from charging on a contingency fee basis in contentious
proceedings.

The law (with narrow exceptions) prohibits
champerty and maintenance,
effectively outlawing third-party litigation financing. These medieval
offences were abolished in the UK in 1967.

There is no class action system
in HK to provide access to justice in cases involving a dispersed group of
victims. In 2012 after 3 years of study and consultation, the Law Reform
Commission recommended the introduction of a limited system for consumer
actions relating to goods and services (but not investments). The Government
deferred this by forming another committee to study the proposals which,
over 5 years later, has yet to report back.

Professional services

Barristers operate a semi-closed shop, resisting the inflow of
competition from other common-law jurisdictions by
requiring them to take a full examination and 6 months of pupillage even
if they only wish to practice in their own expert area. Ad hoc admissions to
work on specific cases are also routinely opposed in court by the Bar
Association.

Doctors, via the Medical Council, also operate a semi-closed shop by
requiring anyone moving to HK to take a full general Licensing Examination
even if they only wish to practice in their specialist field. There is a
form of "Limited
Registration" for only 12 months at a time without the exam, but
at 12-Jan-2018 there were just 12 such doctors in the Hospital
Authority, despite the shortage of doctors in HK. The uncertainty of only a
12-month licence is obviously a deterrent to any professional who might move
to HK. The shortage has been exacerbated by the increasing demand for
medical services from mainland visitors, drawing talent from the public to
private sectors, and also by the aging population.

Real estate markets

Companies and non-permanent residents (those who have lived less than 7
years in HK) are charged a prohibitive 30% stamp duty (including 15%
Buyer's Stamp Duty or BSD)
to buy staff quarters or a home in HK, forcing them to rent instead. At the
high end, a lot of residential properties were already owned by companies
before the relevant law took effect, so the companies are transferred
instead.

If a person sells a home within 3 years of purchase, the transaction
incurs a punitive "Special Stamp Duty"
(SSD) of up to 20% of value, regardless of whether they
have made a gain. This can catch out anyone who needs to relocate or
downsize, or simply wishes to reduce risk after a rise in value, forcing
them to wait until the 3 years are over, thereby keeping potential supply
off the market. This has also stifled the industry of small businesses who
would buy, renovate and sell old apartments.

There is up to 8.5% "Double Stamp
Duty" (DSD) on the transfer of non-residential
properties. This deters businesses from buying office or retail premises and
fitting them out for long-term use, and traps landlords. Both have to work
around it by transferring companies which own properties instead.

Even permanent residents must pay 15% stamp duty on a residential
property unless it is or will be their only home. This also deters people
from buying to let.

None of these higher rates of stamp duty were introduced for the purpose
of raising government revenue (which would be a legitimate, if inefficient,
form of taxation under
Article 108 of the Basic Law). They were instead successively introduced
to deter "speculation" or as "cooling measures", in the mistaken belief that
reducing transaction volume by increasing transaction costs would affect the
value of properties. Value is in reality determined by the net present value
of expected future rentals, which incorporates assumptions about interest
rates, supply of properties and end-user demand.

Basic Law
Article 105 states that the HKSAR shall "protect the right of
individuals and legal persons to the acquisition, use, disposal and
inheritance of property". That includes real estate.
Article 25 states that "All Hong Kong residents shall be equal before
the law" and Article 24 defines "Hong Kong residents" to include
non-permanent residents. Since the various extra stamp duties are not for
the purpose of revenue raising, and since they lack any other legitimate
purpose and (unsurprisingly) have not had the intended effect, they should
be void for restricting rights promised by the Basic Law without
constitutional necessity. However, no affected person has yet filed a
judicial review of this, so the courts have not opined on it. In any event,
the punitive and prohibitive stamp duties are clearly inconsistent with economic freedom.

The extra duties deter assembly of units in old buildings by the private
sector for redevelopment, because if a would-be developer reaches the
requisite 80% or 90% ownership threshold to trigger an auction of the whole
block under the
Land
(Compulsory Sale for Redevelopment) Ordinance, then the developer may
lose the auction and never recover the 30% stamp duty it has paid for
residential units (or 8.5% for non-residential). Only the person who wins
the auction, demolishes the acquired property and commences rebuilding can
recover excess stamp duty.

This leaves the Government's
Urban Renewal Authority with an unfair advantage in redevelopment.
On request from the URA, the Government can invoke powers under the
Lands
Resumption Ordinance to compulsorily acquire properties without having
voluntarily acquired 80% or 90% as the private sector must. To avoid
opposition, the URA pays above fair value to owner-occupiers of the
dilapidated properties by treating the flats as only 7 years old, handing
windfalls to owners, distorting the market and, as they put it in their 2017
annual report: "posing serious threat to our financial soundness". Of
course, any stamp duty that the URA pays loops back to the Government,
giving the URA another unfair advantage.

We could continue, looking at cartels in various sectors, wasteful
state-driven infrastructure projects which suck up taxpayers' resources, yet another
Government-planned "innovation and technology" hub at the Lok Ma Chau Loop, or
non-means-tested welfare spraying, but you get the picture. While HK scores high
on freedom of international trade, it is domestically far from being a free
economy and heading further away with every additional Government intervention.